Motivated by theoretical literature in economics and political science that suggests that determination of a regulatory agenda will have significant economic consequences for the regulated, I examine the significance of auditor, preparer, and financial constituent preferences in the determination of the FASB’s technical agenda. Data on constituent preferences is obtained by leveraging a unique institutional feature of the FASB’s agenda process, namely, formal consultation with an advisory council (FASAC) deliberately structured to represent the Board’s broader constituency in “microcosm.” Disaggregated survey data on FASAC member priority ratings from the FASAC Annual Survey for 323 potential projects considered between 1981 and
2006 provide an opportunity to view the contemporaneous preferences of constituents that are otherwise archivally opaque at the agenda setting stage.
Key findings of my analysis are that constituent priorities are a significant determinant of the FASB’s project selections, and that prior to 2002 influence is concentrated among only a few players, namely, “Big N” audit firms. Post 2002, potentially congruent with the intent of institutional changes designed to sever financial and institutional dependencies between the FASB and the large audit firms, as well to as increase participation of financial statement users in standard setting, Big N audit firms’ priorities no longer appear to dominate the FASB’s agenda decision. Instead, results from 2002 to 2006 suggest that the priorities of financial constituents weigh most heavily in agenda decisions. Contrary to prior literature that examines later stages of accounting standard setting, I find no evidence to suggest significant influence on the part of industrial preparers in agenda setting. Results of my analysis are robust to the inclusion of FASB member ex-ante agenda preferences, SEC project priorities, and year-fixed effects.
Broadly, this paper affords a preliminary look at an important dynamic in the political economy of US GAAP: the role of constituents in determining the FASB’s technical agenda. Given the far-reaching economic impacts of financial accounting standards, the existence and power of forces that influence the selection of topics to be addressed have strong implications for the potential redistributive consequences of accounting standard setting. Although the limitations embedded in a secondary survey analysis do not enable me to establish conclusively whether the concentration of power in agenda setting shifted around 2002 as a direct result of the host of reforms designed to bolster the FASB’s financial independence and/or increase financial constituent participation, my results highlight that a shift has occurred. Future research that
disentangles the effects of various structural and regulatory reforms could shed light on which changes played the greatest role in effecting this change.
Future work in agenda setting can explore additional factors that might influence the FASB’s agenda including the relative influence of public sentiment, accounting scandals, and economic cycles on the quantity and content of topics selected. Although aggregate FASAC preferences likely reflect contemporaneous economic and political forces, the direct effect of such forces merit separate investigation. To what extent, for example, do regulators over-react or under-react in the face of public criticism blaming undesirable economic consequences on poorly crafted accounting regulation? Investigating the influence of constituents after a topic has been added to the Board’s agenda (where my study ends) but before a discussion memorandum or exposure draft is issued (where the majority of existing literature begins) constitutes another avenue for future research. Among the questions that merit exploration are how the universe of alternative solutions to an accounting problem are identified and vetted, and what forces influence the FASB’s original position, project scope, and timeline.
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Appendix A: Illustrative excerpts from the 1998 and 2002 FASAC Surveys and associated Summaries of Responses.
From 1982-2001 the annual FASAC Survey provided a list of potential projects for addition to the Board’s agenda and asked respondents to score each topic according to a pre-defined Likert Scale. Participant responses to the Survey were subsequently presented to Board members in a document entitled “Summary of Responses to the Annual FASAC Survey” (hereafter Summary of Responses) that reported both average participant ratings as well as individual responses. From 2002-2006 the annual FASAC Survey did not provide a list of potential projects but rather asked participants to write in the five projects they felt were most important for the Board to include on its agenda. Individual responses to the Survey as well as a tally of “Top-5” mentions afforded to each project were subsequently presented to Board members in the Summary of Responses.
Excerpts from the 1998 and 2002 FASAC Surveys and Summaries of Responses are provided in this appendix for illustrative purposes.
Illustrative excerpts from 1998
FASAC Survey instructions
“The Board and staff receive many requests and suggestions to add items to the agenda from various sources, including FASAC, the AICPA, and the SEC, among others… This section asks your views on which subjects—if any—the Board should consider for addition to its agenda. The Board also would be interested in other topics, not listed, that you believe should be addressed…Please evaluate the topics in this section on a scale of 1 to 5, with “1” being the highest priority and “5” the lowest. A score of “1” would indicate… respondents are [also] encouraged to comment [qualitatively]”
Summary of Responses
“Comments provided by respondents about possible future agenda projects are detailed below.